Such a set up will be pretty interesting for the class dynamics..
Fighters and Rogues and others with low will saves, who are usually expected to do the most dirty work, will be suffering from combat terror most often.
Alternatively, Wizards / Clerics and those with high will saves will be far less concerned with seeing people killed and harmed. Wizards and low fort save classes will simply be vomiting afterwards more.
I'd also consider an alternative is creating a morale system. When you see your adventuring companion die in combat or simply drop, make a will save.. failure, shaken, failure +5 you flee.. success, no change, success +5 you are resolute to survive/win (gain morale bonuses). Various other circumstances can also cause morale checks in combat with varying reprocussions.. just don't let it slow down combat much, especially in higher levels when characters have seen a lot of death and pain. (Gee, wonder how I run my games? hehe)